Follow the right formula and your franchise can flourish in a competitive marketplace
By FRANK STEED
1. A unique selling proposition
2. A proven economic model
3. An ability to replicate
4. An ability to train
If the business you are considering, either as a franchisor or franchisee, is not a clear winner in all four of those areas, then it is best to walk away.
Yet many people don’t take those qualities seriously enough or they get sidetracked and follow some rabbit-hole diversions that appear on their path. Here are two of the most common ones:
Rabbit Hole No. 1: Mom’s Recipe is Fantastic.
Unfortunately, having a great recipe is not enough, as you’ll see in this article. It is a small piece of the pie, with the rest of the pie being pure business.
Rabbit Hole No. 2: I’m getting all of this encouragement.
The encouragement of others can be misleading. You will find a consultant who tells you you’re headed for a fortune. You will find an attorney that will gladly write up your franchise documents. And you may even be able to find people to invest money in your business.
However, these excited bystanders are not doing the due diligence required for your business. You, however, are doing the research, and that knowledge is powerful.
Quality No. 1: A unique selling proposition, or USP.
The first questions to really dig into are: What is your concept’s reason for being? What makes your concept different? What makes you unique?
You may have an amazing sandwich recipe, but there needs to be more to make you unique. Every concept must have a unique positioning that goes beyond the recipe and into the style, decor, types of people they hire, types of customers they attract and even the look of the sign above their door.
“Uno Chicago Grill has a true signature product in our deep-dish pizza, which anchors our menu,” says chief executive Frank Guidara. “It sets the standard of quality in all we do with our brand. Our restaurant has a real history and heritage of great food, from our legendary pizza to Rattlesnake Pasta. We put the same attention to detail into everything that we do.”
Imagine opening your sandwich restaurant a block or two from a Pot Belly Sandwich Works, McAlister’s or Subway. How will you compete? What is your total package from A to Z that makes your business unique and profitable in a sustainable way?
One secret to answering this question is to not take your own word for it. You can be too close to your business to make a cool-headed decision, and friends and colleagues also will have a bias. The best way to evaluate the USP is to get an outside, professional perspective. Even if there is a cost involved, it is well worth the investment.
Quality No. 2: Proven economic model.
A standalone restaurant can be profitable in the exact situation where a franchisee cannot make it. Same place, same pricing, same recipes. Why? The standalone restaurant does not have the expenses associated with franchising.
As an example, imagine that Daddy’s Hamburger Stand has been in business for 50 years. It has had people knocking on its door asking to franchise the concept most of that time. The owners happily make a 15-percent profit.
Before franchising they must put themselves in the shoes of a franchisee and notice what would be different for this prospective franchisee.
1) Profits will not be the same: The franchise location will make 6-percent to 10-percent less than Daddy’s Hamburger Stand because of royalties and a required investment in marketing. In order to make a living, a franchise location needs to earn between 12 percent and 18 percent, with the 6 percent to 10 percent in franchise expenses already included.
2) Finance and growth will not be the same: Less profits means less opportunity for funding. Franchisees will need a good funding source, most often from a bank. To find out the financially viable franchise concepts it is a good idea to talk to your loan officer as part of your research. The banks know which franchise concepts are solid and will generate a good return for the money.
3) The concept has not been proven in multiple markets: Sometimes the success of a restaurant is a unique phenomenon to a particular area of the country. And people outside this area just don’t take to the idea as well as the natives. For example, let’s look at Chicago Hot Dogs. Although you may find a rogue hot dog stand outside of Chicago, in general, this idea’s success from steamed bun to no ketchup has a Windy City fan base.
“And like anything, practice makes perfect,” explains John C. Miller, president and chief executive of Taco Bueno Restaurants. “Every year the new restaurant economic model needs to be challenged with fresh eyes. Can the same effort be outsourced, take less space, use more efficient and up-to-date equipment, use less energy, require fewer steps, and so forth? Does the guest value or appreciate it? If not, take it out. Does it make the operator’s job easier, better, faster and at lower cost? If not, don’t change it. Test, prove and validate all revisions. Only then roll them out to your franchisees.”
Before franchising or testing your idea in a new market, review your economic model in three ways. First, put yourself in the franchisee’s shoes and see if you would make money with the additional royalty and marketing expenses. Second, put yourself in the banker’s shoes and see if there will be enough money coming in to warrant a loan now and for future growth. And third, put yourself in a brand new, different-part-of-the-world customer’s shoes and imagine them trying your food for the first time. If you’ve ever seen a non-Cincinnatian trying Cincinnati Chili for the first time, you’ll know what to watch out for.
Quality No. 3: Ability to replicate
Sometimes a restaurant is so tied to the unique personality of the creator that the magic is gone without them. For example, Spago and other Wolfgang Puck restaurants are just not the same without Wolfgang Puck himself.
A successful franchise concept needs to be able to be stamped out over and over again independent of the owner, founder or chef that contributed so much to the initial unit’s success.
“The secret is to simplify and systematize the magic of the concept,” shares Phil Friedman, president and chief executive of McAlister’s Corp. “It’s about taking something complex and distilling it to its essence so it can be replicated. For example, we knew the human touch was an important part of the customer experience at McAlister’s so we kept that as part of our concept. We pour the drinks for the customers, bring their food to the table, and offer them refills at their table. It keeps the magic going.”
Concepts in the meal assembly market, Dream Dinners and Let’s Dish, are a case in point as to how important it is to have that magic. Clients go to a location to make a week of dinners to take home with them. The business proposition is sound, but what makes a particular unit successful relies heavily on the personality of the founding owners.
The actual, deep-down reason people go to these take-dinners-home concepts is only partially for the food. Customers are there to stand elbow to elbow with the owners and enjoy the magic of the conversation and social atmosphere.
Most franchised units will be run by hired management. You may find an evangelist who cares almost as much as you do about the business, but for the most part your idea will be implemented by people who do this for a job—not a passionate mission.
Think about the concept that you own or are considering investing in. Will it be a success without you? Can you imagine five locations with five managers with totally different personalities being just as much of a success?
Quality No. 4: Ability to train Last, but not least, is your franchise concept trainable? Can you teach others to repeat the results over and over, with different people, in different parts of the country?
There are concepts that can be franchised easily and those that cannot—and some that are in the middle. For example, The Cheesecake Factory and Grand Lux are too complex to be repeated over and over. The concept grows by slow expansion through company-owned and -operated locations.
On the other end of the spectrum is Applebee’s. Applebee’s was developed with franchising in mind so everything about the operation is trainable and scalable. And somewhere in the middle where it is not easy to franchise, yet not impossible’ is T.G.I. Friday’s. Friday’s is somewhat complex and is growing more slowly than Applebee’s. The proof is in the numbers: There are more than 1,854 Applebee’s units versus 591 T.G.I. Friday’s in the United States.
“If it’s not easily trainable, it cannot be franchised,” stated Stu Waggoner, a former Applebee’s executive turned successful franchisee. “Changing the menu or offering complicated dishes can be a good marketing tool, but it is excruciatingly difficult and expensive for operations. Ask to see the franchisor’s training materials, which should fit in a notebook. If they need a U-Haul trailer for their training materials, run!”
What does all this mean? Evaluate your franchise to see how easy it will be to repeat over and over. Can everything about your concept be brought to its lowest common denominator and turned into a process? Can every recipe be standardized?
So there you have it—the four qualities required for franchise success. Scrutinize your business carefully to see if it has all of these qualities. If even one is missing, put the brakes on and investigate further. Put yourself in the position to invest in a franchise opportunity that will bring you the success and profits that you have earned.